Valeant (VRX) has been hit by another legal bombshell. Mutual fund Lord, Abbett claims $80 billion in investor losses after it bought VRX shares at artificially high prices based on misinformation from Valeant:
Lord Abbett & Co., the mutual fund company, filed a securities fraud lawsuit against Valeant on Wednesday alleging that it bought shares in the drug giant at an artificially high price because of misinformation provided by Valeant. The suit, filed in federal court in New Jersey and alleging violations of New Jersey’s racketeer influenced and corrupt organizations (RICO) law, represents a new and potentially costly legal attack on Valeant, which is already facing lawsuits over alleged manipulation of drug prices …
Various parties have filed RICO suits against Valeant, but only over allegations that the company defrauded them through deceptive business practices, such as overcharging them for drugs. The losses claimed in those RICO cases, in the hundreds of millions of dollars, are small compared with the total of $80 billion in investor losses claimed in Lord Abbett’s RICO suit.
The Lord, Abbett suit is notable if nothing more for the size of the clams. It could burnish Valeant’s reputation as the OJ Simpson of biotechs because it keeps getting sued.
The Lawsuits Keep Piling Up
I have been short VRX for a while on the thesis that the company would fold under its $28 billion debt load at junk levels or its massive legal exposures. Its pending insider trading case pursuant to its failed bid for Allergan (NYSE:AGN) could result in more legal fees or a disgorgement of profits from Bill Ackman’s Allergan trade; such disgorgement could be in the hundreds of millions of dollars.
The most damning exposure could be a federal probe into the aggressive sales practices at former specialty pharma, Philidor. I previously estimated such exposure could be more than $500 million. I am also of the understanding that RICO allows [i] for members of a criminal organization to be penalized. Specifically, RICO addresses racketeering and [ii] individuals to be tried for crimes they ordered others to do or assisted them in doing. In the past Valeant has been accused of engaging in aggressive sales practices through Philidor; alleged aggressive sales practices included steering customers into Valeant-branded drugs and away from generics that might have resulted in clients paying exorbitant prices.
Valeant management has tried to distance itself from the goings on at Philidor. However, former Philidor employees implied Valeant played a key role in the specialty pharma’s operations; if this can be proven then it could potentially buttress the claims of Lord, Abbett and/or other claimants.
The Play For Investors
While lawsuits accumulate the company has cut its debt load from $31 billion around this time last year. However, Valeant has sold key assets and forgone earnings to do so. Reducing debt has energized bulls yet the company’s debt/EBITDA has not improved enough to warrant a ratings upgrade. That speaks volume as to whether or not asset sales have been nothing more than window dressing.
I am on record that Valeant is insolvent by about $8 billion. The company currently has cash of $2 billion, but it needs liquidity to service debt and protect its credit rating. Its cash hoard also helps sentiment. Bulls believe that as long as the company has cash it has a strong chance of surviving. Valeant could one day face a huge pay out from one of these lawsuits, which could hurt its liquidity, deepen it insolvency and sink the stock. I continue to rate VRX a strong sell.